Justice Sam P. Bharucha v. Addl. CIT

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The Tax Publishers2013 TaxPub(DT) 0425 (Mum-Trib) : (2013) 049 (II) ITCL 0502 INCOME TAX ACT, 1961 --Disallowance under section 14A--Expenditure against exempt income--Assessee had earned dividend from mutual funds and from shares besides interest on RBI tax free bonds which were exempt income. Assessing officer disallowed a sum under section 14A by applying rule 8D of Income Tax Rules by following the decision of this Tribunal in case of M/s Daga Capital Management (P) Ltd. Commissioner (Appeals) also confirmed the disallowance made by assessing officer under section 14A. Assessee contended that he had not incurred any expenditure on earning the dividend and other exempt income and also the expenses claimed by assessee were in the nature of expenditure for earning professional income. Therefore, all expenses incurred and claimed by assessee were in the nature of expenditure for earning professional income and no expenses had been incurred in relation to the dividend income from mutual funds. *Held:* Section 14A has within it implicit notion of apportionment in the cases where the expenditure was incurred for the composite/indivisible activities in which taxable and non-taxable income was received. But when it was possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14A has no application. The objective of section 14A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. In order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure was incurred with a view to earn taxable income and there was apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance could be made under section 14A merely because some tax exempt income was received by assessee. Therefore, it was held that no disallowance under section 14A was allowed when assessee had not incurred and claimed any expenditure for earning the exempt income. Income Tax Act, 1961, Section 14A Income Tax Rules, 1962, Rule 8D In the ITAT, Mumbai J Bench G. E. Veerabhadrappa, President & Vijay Pal Rao, J.M. Justice Sam P. Bharucha v. Addl. CIT ITA No. 3889 (Mum.) of 2011 A.Y. 2008-09 25 July, 2012 *Decision:* In assessees favour. Appellant by : K. K. Ved Respondent by : A. K. Nayak JUDGMENT *Vijay Pal Rao, J.M.* This appeal by the assessee is directed against the order dated 24-3-2001 of Commissioner (Appeals) for the assessment year 2006-07. 2. The assessee has raised the following grounds in this appeal : 1. The learned Commissioner (Appeals) has erred in confirming the disallowance of expenditure of Rs. 2,26,58 1 under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. 2. The learned Commissioner (Appeals) has erred in not appreciating the fact that the assessing officer applied the provisions of rule 8D of the Income Tax Rules, 1962 without giving any finding on why he was not satisfied with the appellants books of accounts and submissions that he did not incur any expenditure for earning the exempt income. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0425 (Mum-Trib) : (2013) 049 (II) ITCL 0502

INCOME TAX ACT, 1961

--Disallowance under section 14A--Expenditure against exempt income--Assessee had earned dividend from mutual funds and from shares besides interest on RBI tax free bonds which were exempt income. Assessing officer disallowed a sum under section 14A by applying rule 8D of Income Tax Rules by following the decision of this Tribunal in case of M/s Daga Capital Management (P) Ltd. Commissioner (Appeals) also confirmed the disallowance made by assessing officer under section 14A. Assessee contended that he had not incurred any expenditure on earning the dividend and other exempt income and also the expenses claimed by assessee were in the nature of expenditure for earning professional income. Therefore, all expenses incurred and claimed by assessee were in the nature of expenditure for earning professional income and no expenses had been incurred in relation to the dividend income from mutual funds. Held: Section 14A has within it implicit notion of apportionment in the cases where the expenditure was incurred for the composite/indivisible activities in which taxable and non-taxable income was received. But when it was possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14A has no application. The objective of section 14A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. In order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure was incurred with a view to earn taxable income and there was apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance could be made under section 14A merely because some tax exempt income was received by assessee. Therefore, it was held that no disallowance under section 14A was allowed when assessee had not incurred and claimed any expenditure for earning the exempt income.

Income Tax Act, 1961, Section 14A

Income Tax Rules, 1962, Rule 8D

In the ITAT, Mumbai J Bench

G. E. Veerabhadrappa, President & Vijay Pal Rao, J.M.

Justice Sam P. Bharucha v. Addl. CIT

ITA No. 3889 (Mum.) of 2011

A.Y. 2008-09

25 July, 2012

Decision: In assessees favour.

Appellant by : K. K. Ved

Respondent by : A. K. Nayak

JUDGMENT

Vijay Pal Rao, J.M.

This appeal by the assessee is directed against the order dated 24-3-2001 of Commissioner (Appeals) for the assessment year 2006-07.

2. The assessee has raised the following grounds in this appeal :

1. The learned Commissioner (Appeals) has erred in confirming the disallowance of expenditure of Rs. 2,26,58 1 under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

2. The learned Commissioner (Appeals) has erred in not appreciating the fact that the assessing officer applied the provisions of rule 8D of the Income Tax Rules, 1962 without giving any finding on why he was not satisfied with the appellants books of accounts and submissions that he did not incur any expenditure for earning the exempt income.